SAO PAULO--(BUSINESS WIRE)--(This corrects the release that went out on May 7th, 2014, which attributed the issuance to Tonon Bioenergia S.A. instead of its offshore investment vehicle Tonon Luxembourg S.A.)
Fitch Ratings has assigned a 'B/RR4' rating to Tonon Luxembourg S.A.'s USD230 million proposed senior secured notes due 2024, which will be unconditionally and irrevocably guaranteed by Tonon Bioenergia S.A. (Tonon). Net proceeds from this issuance will be used to fully prepay existing senior secured debt. Fitch currently has 'B' foreign and local currency Issuer Default Ratings (IDRs) for Tonon. A complete list of ratings follows at the end of this press release.
KEY RATING DRIVERS
Tonon's ratings reflect the limited scale of its businesses and the company's exposure to the cyclical sugar and ethanol industry, which is characterized by strong price volatility and risks inherent to the agribusiness sector. Tonon's ethanol business is also exposed to industry dynamics with prices linked to Brazil's regulated gasoline prices. The government energy policies can potentially impact the profitability of the ethanol business. The ratings also incorporate Tonon's sizeable investment plans for the upcoming years, which should pressure the company's free cash flow (FCF).
Average Business Position
Tonon is a medium-sized sugar and ethanol company in a fragmented commodity sector in which scale is relevant and volatility is high. The company has 8.2 million tons of crushing capacity per year, distributed in three industrial units located in the states of Sao Paulo and Mato Grosso do Sul. Capital expenditures should increase crushing capacity to 9.4 million tons, while maintaining flexibility to produce up to approximately 60% of sugar or ethanol. Tonon's sugar production is mostly exported while around 80% of its ethanol production is sold to domestic market.
Sizeable capex program pressuring Free Cash Flow
Fitch expects Tonon's FCF to be negative in the next two years. Up to the 2015/2016 harvest period, total investment should reach approximately BRL710 million, primarily in the expansion of the Vista Alegre Unit in the state of Mato Grosso do Sul. Investments in the expansion of Vista Alegre's cane fields should be relevant as virtually all of Vista Alegre's sugar cane is self-supplied. This plant should have its capacity raised to 3.7 million tons from 2.5 million tons by the beginning of the 2015/2016 season and Tonon's total capacity will grow to 9.4 million tons from the current 8.2 million tons. In the last 12 months (LTM) ended in Dec. 31, 2013, Tonon's free cash flow (FCF) was negative BRL18 million, including Paraiso Bioenergia. The pro forma capex figure was BRL239 million in the same period. During the same period, Tonon's revenues were BRL799 million, while its EBITDA was BRL353 million.
Fitch expects the company will be able to manage its net leverage at an adequate level of below 3.0x in the medium term. On a pro forma basis, considering 12 months of Paraiso Bioenergia's operations, Tonon's net adjusted leverage has increased to 3.7x for the LTM ended Dec. 31, 2013, compared to 3.0x in March 2013. Fitch's projections consider mid-cycle prices of sugar and ethanol, assuming USD20 cents per pound for the next harvest periods. The company's results will ultimately depend on the company's ability to complete the necessary investments and increase its capacity utilization within the expected schedule, in order to avoid pressure on its capital structure.
Tonon reported manageable debt repayment profile and moderate liquidity as of Dec. 31 2013. Tonon has maintained part of the USD300 million seven-year unsecured notes in cash. The proposed USD230 million issuance should improve the company's debt maturity schedule. As of Dec. 31 2013, the company's cash reserves amounted to BRL184 million represented 80% of its short-term debt of BRL233 million (as per Fitch's internal methodologies). Tonon's long-term debt accounted for 83% of the on-balance gross debt outstanding as of Dec. 31 2013, of which 58% will fall due in January 2020 (the BRL300 million unsecured notes). On a pro forma basis, after this new transaction, cash should cover 217% of short-term debt.
A negative rating action could be triggered if the company's liquidity deteriorates and/or if leverage increases on a consistent basis. A downgrade will also occur if the expected improvement of Cash Flow from Operations (CFO) does not materialize.
A positive rating action will occur if leverage goes down on a consistent basis and if the company manages to maintain or improve liquidity.
Fitch currently rates Tonon as follows:
Tonon Bioenergia S.A.
--Foreign and local currency IDR 'B';
--USD300 million senior unsecured notes due 2020 'B/RR4';
Tonon Luxembourg S.A.
--USD230 million senior secured notes guaranteed by Tonon Bioenergia S.A. due in 2024 at 'B/RR4'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Ratings - Methodology Update' (Oct. 31, 2013).